TEMPO.CO, Jakarta - The House of Representatives's early approval of the 2016 state budget bodes well for the economy in the coming year, despite global uncertainty and pending key projects domestically. This means government spending can start early in the year, which could accelerate infrastructure and other capacity-building projects.
After a very slow start and somewhat lacking in direction, the Jokowi government managed to come up with a few convincing measures, following the reshuffle of his cabinet. Notably, he was brave enough to start out with cutting back on fuel subsidies, something that should have been done under previous governments. But given the conditional reliance on external factors, the outlook for a full-fledged recovery is unlikely to happen in the coming year.
The government is short of options to improve the economy. Hoping for better global economic prospects must be taken off the list. The two global economic powerhouses, the United States and China, are experiencing problems. The US is still facing economic uncertainties, while the Chinese economy continues its decline. Indonesia cannot depend on these two nations, especially as export markets.
What is needed now is a drive to improve domestic economic prospects. Improvements to infrastructure and the reduction of high economic costs should be prioritized at this time of economic stagnation. For too long, the Indonesian business world has been beset by these two fundamental problems. As a result, Indonesian products are not competitive, not only compared with other products in export markets, but also domestically.
The government has issued several economic packages to overcome various problems. One of them reduces the bureaucracy related to permit issuance. But far more important is putting them into practice. These policies may start off being loudly proclaimed, but then they can still slowly fade away.
Taxation policies also need further improving. The tax rate in Indonesia is high at 25 percent. This is the same as in Malaysia, but higher than Singapore (17 percent) and Thailand (23 percent). As a result, it is very difficult for Indonesia to convince tycoons to repatriate their funds invested overseas. Several policies have been issued, including by Bank Indonesia, but the results have yet to be seen. Indonesia needs their money to drive the economy forward.
And issues of labor and wages continue to haunt the business world. The government should produce a road map of policies covering at least the next five years so businesses can make estimates of future labor costs. At present, the business world is always uneasy as the end of the year approaches and the government announces its decision about laborers' wages.
These measures could improve the supply side of the national economy. But the government should also improve the demand side. There is no point in companies increasing production or expansion if there are no customers. This would simply create a vicious circle because companies would once again reduce production and take efficiency measures, including laying off workers.
It's not possible for the government to solve all these problems, given budget limitations. But it has been shown that government spending can boost the economy. In the third quarter of 2015, when budget funds started being spent, growth rose to 4.9 percent, compared with 4.67 percent the previous quarter. Therefore, the government needs to overcome a problem that has become a cliche: delayed realization of budget spending.
There are many budget items that can be used to improve purchasing power. Besides infrastructure spending, which will total Rp313.5 trillion next year, the government still has Rp770 trillion of funds to be transferred to regions and villages. If it can improve the budget realization process, and keep thieving hands away from the state till, buying power will increase. This will also need another guarantee, the maintenance of food prices.
The economic outlook for 2016 remains uncertain, but if the government can strengthen the domestic economy, there could be a few bright spots ahead. (*)
Read the full Indonesia's Economic Outlook for 2016 in this week's edition of Tempo English Magazine
